UK Economic Outlook Slumps – UK May Lose Triple-A Rating If GDP Growth Continues To Disappoint, Warns Moody’s

UK economic outlook slumps on eurozone crisis (Guardian, July 31, 2012):

UK may lose triple-A rating if GDP growth continues to disappoint, Moody’s ratings agency warns

The UK’s economic outlook has weakened as a result of the eurozone debt crisis, Moody’s has said in a fresh blow to the chancellor George Osborne.

The ratings agency cut its forecasts for GDP growth, after figures last week showed the UK economy shrank by 0.7% in the second quarter – far more than expected.

Moody’s expects GDP to grow by just 0.4% this year and 1.8% in 2013, which is considerably more optimistic than many economists, who expect the economy to contract this year. Gerard Lyons at Standard Chartered said after the GDP figures were published: “I think it’s inconceivable that there will be positive growth this year.”

Moody’s warned on Tuesday that Britain could lose its triple-A rating if economic growth did not meet expectations, and if the country’s debt burden increased. It said the weaker economic environment could challenge the government’s efforts to reduce debt in the coming years.

The main issues facing the UK economy were the impact of rising prices on real incomes, “the confidence shock” from the eurozone, and a greater impact from the financial crisis on output than previously thought.

“The UK’s outstanding debt places it amongst the most heavily indebted of its Aaa-rated peers, alongside the United States and France whose triple-A ratings also carry a negative outlook,” it added. Moody’s expects gross government debt to GDP to peak at just under 95% in 2014 or 2015, before it starts to come down – higher and later than in most other triple-A rated countries.

While the UK enjoys “safe haven” status, Moody’s said there was a growing risk that the weaker macroeconomic outlook could damage market confidence in the government’s austerity plan and cause the cost of borrowing to rise.

The agency applauded Osborne for sticking to Plan A, saying the UK’s triple-A rating was supported by the fact that “the current fiscal consolidation programme remains intact and the government has demonstrated its willingness and ability to take action to address shortfalls”.

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